Alan Greenspan - Deregulation Guru

Senator Byron Dorgan (North Dakota) stood up for the American people today. He pointed out that the financial reform bill is too weak. Without fixing provisions (breaking up the big banks) and regulating credit default swaps, he declared "shame on us. We have a responsibility here."

I think it's critical for us to understand the huge amounts of money that sits in these large banks, billions and billions of dollars. Banking is no longer simply checking and savings accounts. Banking is now about these high risk derivatives that yield lots of money but also carry lots of risk. The complexity of these financial tools needs to be regulated. An excellent example is the situation where five school districts in Wisconsin invested $200 million in something they thought was safe. (I'm not sure why anybody would think a collateralized debt obligation -- CDO -- would be a safe investment. I'm not sure many people would consider a synthetic CDO [another order of complexity] would be safer.) You know how this is going to go. The investment starts off well, heads south, then crashes. The five school districts lost everything. It is this kind of craziness which has to be regulated. Now, before you go and point out that a bunch of teachers might be excused for having trouble understanding synthetic CDOs, you should know that the schools had a financial wizard working on this. Even he didn't understand it.

On October 15, 2009, Alan Greenspan, former Federal Reserve Chairman and economic guru for the past 30 years, was at the Council on Foreign Relations. Chairman Greenspan did a formal question-and-answer session then took some questions from the audience. (emphasis is mine)

One questioner asked: "How specifically should we address the issue of financial institutions that are too big to fail?"

Alan Greenspan said: If they're too big to fail, they're too big. (Laughter.)
I -- this one has got me. And the reason it's got me is that we no longer have the capability of having credible government response which says, henceforth no institution will be supported because it is too big to fail...

I think -- I mean, I hate to think of just arbitrarily breaking down organizations into various different sizes. At a minimum, you've got to take care of the competitive advantage they have, because of the implicit subsidy, which makes them competitively capable of beating out their smaller competitors, who don't get the subsidy.

So I don't have a simple solution, but that something has to be done. There is no doubt in my mind -- and I don't think merely raising the fees or capital on large institutions or taxing them is enough. I think that'll -- they'll absorb that; they'll work with it; and they will still be inefficient; and they'll still be using the savings.

So I mean, radical things, as you -- you know, break them up, you know. In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole. Maybe that's what we need.

If Alan Greenspan says we should break up the banks, then we need to break up the banks. Greenspan believed in deregulation and free markets. He presided over the largest deregulation of our economy in the last 60 years. He has concluded that he was wrong. The markets need some guidance, some control. That control has to come from the federal government. It can't come from anywhere else.